In the Athens riots of February, 2012, the city centre turned into a war zone. Dozens of buildings were torched and the streets overflowed with battling rioters and police. The austerity backlash was evolving into civil war. I covered the riots, and I was certain that Greece's economy was doomed. I waited for the moment when Greece would hightail it out of the euro zone, taking down Spain, Portugal and even Italy.
Scroll forward to the early summer of 2013. The sleek new Athens hotel where I am staying, appropriately called New Hotel, is packed even though it's not cheap. Ditto Black Sheep, a simple restaurant near the old Olympic stadium that opened last year and specializes in top-quality local ingredients. It cannot guarantee a dinner reservation on less than a week's notice. In a northern suburb of Athens, Diwine, a new wine bar that doubles as a nightclub, is alive on weekday evenings with young, well-groomed clients.
Economists refer to the mini-eruptions of new businesses in distressed economies as "green shoots." To be sure, Greece is not saved and reprinting the disgraced old drachma is not out of the question if the country is hit with another political and financial shock wave. Greece's economy has been shrinking for five years and unemployment was 27 per cent in April, including a horrific 59 per cent among youths.
So what's the good news? The quarterly rate of gross domestic product contraction is falling rapidly. The finance minister, Yannis Stournaras, told me he expects GDP to flat-line in the fourth quarter and move into positive territory next year. His prediction elicited skepticism from some of his peers, including the governor of the Bank of Greece.
But I think Stournaras is right, and I am even more optimistic than he is, not just for Greece, but for the euro zone's other clapped-out economies, too. While most politicians, central bankers and economists remain exceedingly conservative on their growth forecasts – they learned their lesson by vastly underestimating the nastiness of the Greek and euro zone recessions – I will crawl much farther out on the economic limb and predict a compelling rebound in some countries and a surprisingly strong one in Greece and possibly Spain. Italy remains the wild card; its reluctant austerity drive began much later, implying it will emerge from recession much later.
As late as March, when Cyprus's oversized banking system blew up and set a precedent by whacking bank customers – the infamous involuntary depositors' "haircut" – a new euro zone crisis seemed imminent. Arrivederci, Greece, Portugal, Spain and possibly Italy. That turned out to be wishful thinking among the short sellers. Since then, the strong economic headwinds have given way to gentle tailwinds. A bunch of lesser economic indicators – and one biggie – have finally started to move in the right direction. The former includes a 1 per cent rise in retail sales in European Union countries in May – a nice little rebound from the 0.2 per cent drop in each of the two previous months – and a slight fall in Spanish unemployment with the summer hiring spree. The latter is the surprising manufacturing strength in Germany, France, Spain and a few smaller European countries, thanks, apparently, to pent-up demand, falling costs and waning austerity programs.
This spring, German industrial production was up 2 per cent in April over March, marking three consecutive monthly increases. The bigger surprise was France, where industrial production rose 2.2 per cent in April even though the economy is in recession. But Spain was the biggest surprise of them all. In April, year-on-year industrial production fell just 1.5 per cent; over the past five years, declines of more than 5 per cent had been the rule.
Could the improving industrial production be a harbinger of a swift economic recovery in the euro zone? History says it could. We know a couple of things about recessions. The first is that they always end. The second is that sharp contractions can trigger equally sharp recoveries–the "V-shaped" rebounds of the economists' lexicon. Recoveries can happen even if sovereign and personal debt is high, banks are undercapitalized and wary of lending, and overall consumer sentiment is in the tank.
Marshall Auerback, a research associate at Bard College's Levy Economics Institute, notes industrial production fell more than 50 per cent in the early years of the Great Depression. Then, between July and October, 1932, it surged 14 per cent even though the banking system was a wreck and real interest rates were high because of price deflation. With a few blips, production kept rising until 1937, fell once again, then rebounded at the start of the Second World War.
The entrepreneurs in Athens are brave to be launching new businesses in a deep recession, but they're not crazy. They know the best time to get in the game is when the economy is reaching bottom. "People here want to forget about the recession and get on with their lives," says Damien Apostolatos, the creator of the Diwine wine bar. I think – and hope – he is right.